One of the most talked about tax legislation changes that will impact less than 0.5% of the Australian adult population is Division 296.
The main controversy of course is that the limit of $3m in super or above, is not indexed. So most young adults today will be impacted/taxed, if this part of the new law is not amended.
Let’s explain how it is supposed to work.
At this stage the expected timelines are as follows.
Date |
Event |
| 1 July 2025 | Division 296 becomes law |
| 30 June 2026 | First Assessment date – super balances checked for threshold |
| 1 July 2026 onwards | ATO issues tax assessments for FY25/26 earnings |
How Tax of Superannuation Investment Earnings is Calculated
Current Tax Treatment
Currently superannuation fund investment earnings (other than investment earnings associated with retirement accounts) are taxed at a headline rate of 15 percent. However, that part of investment earnings attributable to capital gains regarding assets held more than 12 months receives a one-third discount, effectively reducing the tax rate to 10 percent on realised capital gains. There also will be imputation credits connected with share dividends that can be used to offset tax liabilities and which are refundable if there is no tax liability.
Investment returns associated with retirement accounts are tax-free. There is a limit to the amount an individual can place in the retirement accounts, with this called the Transfer Balance Cap. This cap is indexed and is currently at $2 million. Those who have set up a retirement account in the past may have had a lower Transfer Balance Cap. The amount each individual can have in a retirement account will depend on their initial Transfer Balance Cap and subsequent investment earnings and withdrawals. Current balances in regard to which investment earnings are tax free will vary from individual to individual. Balances supporting tax free investment returns often will be below $2 million but it is possible to have a higher balance, even exceeding $10 million, if investment returns (including capital gains) have been strong.
Currently for retirees with large balances a proportion of their total balance will have investment earnings tax free with the remainder having the same tax treatment applicable to pre-retirement balances. The proportion will depend on individual circumstances rather than being a simple calculation based on the total amount of superannuation a person has.
Proposed Division 296 Tax
The proposed tax on imputed investment earnings associated with the proportion of earnings attributed to balances above $3 million also employs a headline rate of 15 percent, but as shown by the examples below are several adjustments made in calculating the tax liability. The 15 percent Division 296 tax rate cannot be simply added to the current headline rate to come up with a total effective tax rate on investment earnings.
While current taxation of superannuation investment earnings uses traditional measures of taxable income, the taxable earnings under Div 296 are found by deducting the total super balance accounts held by an individual at the start of the year from the balance at the end of the year, adding some outgoings such as pension payments, and subtracting some items that increased the balance, like super contributions.
Because the tax is calculated on valuations at a point in time, it requires at least annual market valuations of assets to be undertaken. Both APRA regulated funds and SMSFs are already required to undertake at least annual market valuations of assets held.
There also are around one million Australians who have an account in a defined benefit fund. Defined benefit superannuation funds do not have account balances or investment earnings that are attributable to individual fund members. Actuarial calculations are needed to calculate what the value of a defined benefit fund member’s interest in their superannuation. The Government is proposing that the valuation factors used for Family Law splitting of benefit purposes should be used for the Division 296 tax calculation.
Only a relatively small proportion of defined benefit fund members will have benefit entitlements that have an actuarial value of over $3 million.
Members of defined benefit funds also generally do not have access to their superannuation until they retire. These differences from the more common accumulation accounts in superannuation generally mean the Div 296 tax would be calculated each year, but only paid when the member retires.
